PICC Takes Tight Grip on Mega-IPO

By Prudence Ho

Reuters

In a weak year for initial public offerings, bankers have welcomed the IPO of People’s Insurance Co. (Group) of China Ltd. They say, though, that the insurer has taken an unusually firm grip on the sale, reducing banks’ control of the process.

Until this year, investment banks in Asia made a large chunk of their revenue from underwriting IPOs in Hong Kong, the top venue for such deals in the three years through 2011. In 2012, though, sentiment toward new listings has soured because some deals have performed poorly.

Not counting the PICC deal, which could raise as much as US$3.6 billion, the Hong Kong Stock Exchange would rank fifth globally in terms of IPO volume. With the offering, it ranks third, behind the New York Stock Exchange and the Nasdaq Stock Market.

Adding to the challenges for banks, PICC’s share sale has been firmly in the hands of the company, rather than the many bankers on the deal. The transaction has 17 bookrunners—the underwriters charged with actually selling the deal—a record number.

Agricultural Bank of China Ltd.’s US$22.1 billion dual listing in Hong Kong and Shanghai in July 2010—the biggest by a Chinese company—had just seven bookrunners in its Hong Kong tranche.

A person close to PICC said the insurer works closely with professional parties and didn’t have any more control over the IPO process than the norm.

The process of getting chosen to work on the PICC deal was unusual, bankers say. In the usual Hong Kong IPO, bankers are appointed to work on deals and then have to bring in so-called cornerstone investors—institutional buyers that commit to buy large chunks of stock, reassuring other investors that demand is solid. Such buyers are particularly critical in the current tough IPO environment.

Bankers in the PICC IPO process say they had to get cornerstone investors to commit first, before getting appointed to work on the deal. How much they brought in also determined their status—and potential fees—for the job.

Deutsche Bank AG lined up a US$300 million investment from State Grid Corp., the second-largest cornerstone investor in the PICC IPO after American International Group Inc., which agreed to buy US$500 million, and formally won itself a global coordinator role at last, people with direct knowledge of the matter said.

The global coordinators in an IPO are the senior underwriters and are responsible for managing the overall transaction. They are also bookrunners, and get the highest fees in the process.

Deutsche Bank’s entry brought to five the global coordinators on the PICC IPO. The others are Goldman Sachs Group Inc.Credit Suisse Group AG, China International Capital Corp Ltd., and HSBC Holdings PLC. According to bankers on the deal, the global coordinators didn’t know their roles until the day before the order-taking process, the so-called roadshow, began Thursday.

PICC also kept its cards close to its chest in terms of how much each cornerstone buyer was committing to purchase, until order-taking actually began on Thursday last week, bankers said. Usually, such information is open to bankers well before order-taking begins.

PICC’s strategy has reaped some benefits. Despite this year’s listing drought, and after having to delay its IPO in June, PICC managed to pre-sell half the IPO to cornerstone investors. In total, it secured US$1.77 billion in cornerstone investments from 17 companies, among them State Grid AIG, French insurer Scor SE and China Life Insurance (Group) Co.

Bankers said there was already enough demand to cover the entire offering on the first day of order-taking last week. Order-taking ends this Thursday, while the listing is set for Dec. 7.

Bankers on the deal won’t be as lucky as PICC appears to be. The IPO prospectus says that total fees paid to 17 banks will amount to 2.5% of the amount raised. That amounts to US$90 million if the stock sells at the top end of the price range. Each bank would get US$5.3 million if the money is divided evenly.

The October 2010 IPO of AIA Group Ltd., an insurer sold by AIG, was more lucrative. AIA paid the 11 bookrunners 1.75% of the $20.5 billion IPO as fees, which means each likely got around $32.6 million.

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